Takaful

1
Takaful
Hailey Collage o f Banking Finance Punjab
University- Lahore. 13th August, 07
An emerging niche market
By Capt. M. Jamil Akhtar Khan
ACII, MCIT, Master Mariner Chief
Executive Officer TAKAFUL PAKISTAN LIMITED
2
Outline of Presentation

• Introduction to Takaful
• Objections to Conventional Insurance
• Difference b/w Conventional Insurance Takaful
• Takaful Through Time
• Takaful Models
• Takaful Types
• BancaTakaful
• ReTakaful
• Foundations of Takaful in Pakistan
• Takaful Prospects in Pakistan
• Challenges to Takaful
• Introduction to TAKAFUL PAKISTAN LIMITED

3
Introduction to Takaful
4
Meaning of Takaful

• Takaful comes from the Arabic root-word kafala
  guarantee.
• Takaful means mutual protection and joint
  guarantee.
• Operationally, takaful refers to participants
  mutually contributing to a common fund with the
  purpose of having mutual indemnity in the case of
  peril or loss.

5
Reference Al Quran

• Help (taawan) one another in furthering virtue
  (birr) and Allah consciousness (taqwa) and do not
  help one another in furthering evil and enmity.
  Al Maidah verse 2 (52).
• Takaful is a form of mutual help (taawun) in
  furthering good/virtue by helping others who are
  in need / in hardship .

6
Reference Hadith

• tie the camel first, then submit (tawakkal) to
  the will of Allah
• The hadith implied a strategy to
  mitigate/reduce risk.
• Takaful provides a strategy of risk
  mitigation/reduction by virtue of collective risk
  taking that distributes risks and losses to a
  large number of participants. This mitigates the
  otherwise very damaging losses, if borne
  individually.

7
Declaration by Shariah scholars rendering
conventional insurance un-Islamic

• Fatwa issued in Judicial Conference held in
  Makkah in Shaban 1398 AH.
• Verdict of Supreme Court of Egypt on Dec. 27,
  1926.
• Unanimous resolutions and fatwa by Ulama in the
  Muslim League Conference in Cairo in 1965.
• Unanimous decision by Muslim Scholars in seminar
  held in Morocco on May 6, 1972.

8
Judicial Opinions and Fatwas confirming validity
of Takaful

• Fatwa issued by Higher Council of Saudi Arabia in
  1397 A.H.
• Fatwa Issued by the Fiqh Council of Muslim World
  League in 1398 A.H.
• Fatwa issued by the Fiqh Council of the OIC in
  1405 A.H. (1985).

9
Fiqh Academy Resolution 1985

• Islamic Fiqh (science of Shariah) Academy,
  emanating from the Organization of Islamic
  Conference, meeting in its Second Session in
  Jeddah, KSA, from 10 to 16 Rabi-ul- Thani, 1405
  A.H. (Dec 1985) issued a Resolution which in
  summary stated the following
• The commercial Insurance contract is prohibited
  (Haraam) according to the Shariah.
• The alternative Takaful contract which conforms
  to the principles of Islamic dealings is Halaal,
  being the contract of cooperative insurance,
  which is founded on the basis of charitable
  donation and Shariah compliant dealings.

10
Basic Elements of Takaful

• Mutuality and cooperation.
• Takaful contract pertains to Tabarruat as
  against muawadat in case of conventional
  insurance.
• Payments made with the intention of Tabarru
  (contribution)
• Eliminates the elements of Gharrar, Maisir and
  Riba.
• Wakalah/Modarabah basis of operations.
• Joint Guarantee / Indemnity amongst participants
  shared responsibility.
• Constitution of separate Participants Takaful
  Fund.
• Constitution of Shariah Supervisory Board.
• Investments as per Shariah.

11
Main drivers of Takaful

• Piety (individual purification)
• Brotherhood (mutual assistance)
• Charity (Tabarru or contribution)
• Mutual Guarantee
• Community well-being as opposed to profit
  maximization.

12
Objections to Conventional Insurance
13
Insurance Defined

• Definition of an Insurance Contract
• An agreement whereby one party, the insurer, in
  return for a consideration, the premium,
  undertakes to pay to the other party, the
  insured, a sum of money or its equivalent in kind
  on the happening of a specified event, which is
  contrary to the insureds financial interest
• Subject-matter of an Insurance Contract
• what is it that is insured in a fire policy?
  Not the bricks and materials used in building the
  house, but the financial interest (i.e. money) of
  the insured in the subject-matter of insurance
  (Lord Justice Brett
  in Castellian v. Preston 1883)

14
Objections to Conventional Insurance

• Scholars view the insurance contract as an
  exchange contract money is being exchanged for
  money over time.
• This brings about the problem of gharrar (which
  leads to maisir) and in investments aspect, riba.
• Elements of
• Uncertainty Gharrar
• Gambling Maisir
• Interest Riba
• UW Investment Profit belongs to the Company
• Note that the Scholars do not object to insurance
  per se but only to certain weaknesses in the
  insurance contract.

15
Uncertainty Gharrar

• Conventional insurance contract is basically a
  contract of exchange (muawadat) i.e. buying and
  selling whereby policy (indemnity) is sold as
  goods, with the premium as the price or
  consideration.
• The consideration must be certain for exchange
  contract.
• Gharrar in insurance contracts pertains to
  deliverability of subject matter, i.e.
  uncertainty as to
• Whether the insured will get the compensation
  promised?
• How much the insured will get?
• When will the compensation be paid?
• Thus, it involves an element of uncertainty in
  the subject matter of the insurance sales
  contract, which renders it void under the Islamic
  law.

16
Gambling Maisir

• Insurance is a contract upon speculation. Good
  faith forbids either party from concealing what
  he privately knows, to draw the other into a
  bargain, from his ignorance of that fact, and his
  believing to the contrary (Lord Mansfield in
  Carter v. Boehm 1766).
• The insured loses the money paid for the premium
  when the insured event does not occur.
• The company will be in deficit if claims are
  higher than premium.

17
Interest Riba

• . Allah has permitted trading and forbidden
  riba (Al Baqarah 2 275).
• Insurance funds are invested in financial
  instruments which contain the element of Riba.

18
Comparing Takaful to Conventional Insurance
19
Takaful Through Time
20
Takaful through Time

• Origins in the First Constitution of Madina.
• It evolved and continued in one form or the other
  throughout the Abbaside period and even later
  during the Ottoman empire.
• Serious efforts were made in modern times, in
  1970s to come up with an Islamic alternative to
  the conventional insurance.
• The first Takaful company was set up in Sudan in
  1979, almost simultaneously followed by another
  one set up in Bahrain.

21
Takaful through Time (Contd.)

• There are now 85 Takaful companies in over 25
  countries.
• The total insurance premium of OIC countries for
  2004 was USD 50 Billion of this, Takaful
  contribution accounts for 5 (i.e. USD 2.5
  Billion). This is expected to increase to USD 15
  Billion by 2015.
• Poor Insurance penetration in the Muslim
  countries (lt1 of GDP).
• Average growth rate higher than conventional
  insurance companies (around 25).
• NonMuslims increasingly opting for Takaful
  products for commercial benefits.

22
(No Transcript)
23
Takaful Models
24
Mudaraba Model

• The surplus is shared between the participants
  with a takaful operator. The sharing of such
  profit (surplus) may be in a ratio 55 , 64 etc.
  as mutually agreed between the contracting
  parties. Generally, these risk sharing
  arrangements allow the takaful operator to share
  in the underwriting results from operations as
  well as the favourable performance returns on
  invested premiums.

25
Profits attributable to Shareholders
Mudaraba Model
Companys Admin. Mangt. Expenses
Company
Companys Share from Surplus
General Takaful Fund
General Takaful Fund
Operational Cost of Takaful
Surplus (Profit)
Participant
Takaful Contribution paid by Participant
Participants Share from Surplus
26
Wakala Model

• Cooperative risk sharing occurs among
  participants where a takaful operator earns a fee
  for services (as a Wakeel or Agent) and does not
  participate or share in any underwriting results
  as these belong to participants as surplus or
  deficit. Under the Al- Wakala model, the operator
  may also charge a fund management fee and
  performance incentive fee.

27
Wakala Model
Mudarib's Share of PTFs Investment Income
Profit From Investments
Management Expense of the Company
Profit/Loss attributable to Shareholders
Wakala Fee (30 to 35)
Company (Capital)
Takaful Contribution paid by Participant
Investment by the Company
Investment Income Sharing on Mudaraba Basis
General Takaful Fund
Operational Cost of Takaful/ ReTakaful
Surplus (Profit)
Surplus Distribution to Participants
Participants Takaful Fund
Investment Income
Reserves
28
Wakala -Waqf Model

• It is a WAKALAH model with a separate legal
  entity of WAQF in-between.
• The relationship of the participants and the
  operator is directly with the WAQF fund. The
  operator is the Wakeel of the fund and the
  participants pay contribution to the WAQF fund by
  way of Tabarru.
• The contributions received would also be a part
  of this fund and the combined amount will be used
  for investment and the profits earned would again
  be deposited into the same fund which also
  eliminates the issue of Gharar.
• Losses to the participant are paid by the company
  from the same fund.
• Operational expenses that are incurred for
  providing Takaful services are also met from the
  same fund.

29
Wakala-Waqf Model
Share Holder
S H A R E H O L D E R S F U N D (S.H.F.)
Mudaribs Share of PTFs Investment Income
Wakalah Fee
Investment Income
Management Expense of the Company
Profit/Loss
Takaful Operator
Investment by the Company
WAQF
Claims Reserves
Surplus (Balance)
Investment Income
Operational Cost of Takaful / ReTakaful
Participant
P A R T I C I P A N T S T A K A F U L F U N D
(P.T.F.)
30

• Models The beauty of Islam lies in its
• plurality !

31
(No Transcript)
32
General Takaful Types

• General Takaful offers all kinds of non-life
  risk coverage. It is normally divided into
  following classes
• Property Takaful
• Marine Takaful
• Motor Takaful
• Miscellaneous Takaful

33
Types of Family Takaful

• Term Life Takaful
• Whole Life Takaful
• Endowment Takaful
• Universal Takaful
• Marriage Plan
• Education Plan

34
Takaful Policy Document / Participants
Membership Document

• Preamble
• This is to acknowledge that the applicant
  (hereinafter called the 'Participant'), as more
  fully described in the schedule hereto
• i. Is accepted as a member of the Participants'
  Takaful Fund (hereinafter called the 'Fund')
  operated by Takaful Pakistan Limited (hereinafter
  called the 'Company').
• ii. Being a member of the Fund, he/she is
  acknowledged as a beneficiary under the attached
  Indemnity Policy of the Fund, and of the benefits
  declared by the Fund from time to time under this
  policy, in accordance with the Waqf rules
  governing the Fund.
• iii. Subject to the participant continuing as a
  member of the Fund and complying with his/her
  undertaking under his/her declaration made in the
  proposal form, he/she is indemnified by the Fund
  as one of its beneficiaries against the
  perils/events described, in the manner and to the
  extent as stated hereunder.

35
Takaful Policy Document / Participants
Membership Document

• Duration
• Normally policies are issued for the duration of
  twelve months.
• Extended coverage on project policies.
• MARINE POLICY The membership under this
  document shall be for the period of _________
  months. However, the benefits under this
  document, except Surplus if any, shall cease on
  the arrival of goods at destination.

36
Takaful Policy Document / Participants
Membership Document

• Cancellation Clause
• This Policy may at any time be terminated at the
  option of the Company, on 14 days' notice to that
  effect being given to the Participant at his last
  known address. In that case, the Participant
  shall be GIVEN an amount equivalent to a ratable
  proportion of the contribution for the unexpired
  Period of Policy from the date of such
  cancellation. This Policy my also be terminated
  at any time at the request of the Participant, in
  which case the Participant will be PAID an amount
  equivalent to the actual contribution made
  initially by him/her, less the amount worked as
  per the following scale applicable to the period
  during which the policy has been in force

37
Takaful Policy Document / Participants
Membership Document

• TAKAFUL OPERATOR'S FEE
• The Company shall deduct Takaful Operator's fee
  out of the Contribution received under this
  Policy. Such fee shall be based on the Wakala
  principle since the Company hereby acts as a
  Wakeel on behalf of the Fund.
• INVESTMENT MANAGEMENT SHARE
• The Company shall act as a Mudarib for the
  purpose of managing the investment of the
  Participant's Contribution. As such, the Company
  stands entitled to a share in the investment
  income thereof as Mudarib.

38
Takaful Policy Document / Participants
Membership Document

• SURPLUS DISTRIBUTION
• If, at the end of the period of Policy stated in
  the Schedule, there is a surplus in the General
  Takaful Fund, the same shall be distributed among
  the Participants. Provided that, in case the
  Participant has made any claim or received any
  benefits under this Policy, that claimed amount
  shall be deducted from the net amount worked out
  as due to the Participant.

39
BANCATAKAFUL

• Background
• Range of Products
• Savings ? Personal Accident, Homeowners
  Comprehensive, Credit Cards, etc.
• Financing, Individuals ? Car Ijarah, Housing
  Musharika, Mortgage Takaful.
• Financing, SMEs ? Trade Credit Takaful, Business,
  Office, Equipment, Assets.
• E-Commerce

40
BANCATAKAFUL (Contd.)

• Advantages of BancaTakaful
• Facilitation Desk / Equipment.
• Fast Turnaround Time.
• One-Stop shop for Clients.
• Concept of Islamic Financial Supermarket.
• Value Added Services.
• Law of Large Numbers.
• Lower Contribution Rates.
• Attraction for Depositors.
• Synergy.

41
ReTakaful

• Currently few ReTakaful companies worldwide
  offering a relatively small capacity
• Sudan (1979) National Reinsurance.
• Sudan (1983) Sheikhan Takaful Company.
• Bahamas (1983) Saudi Islamic Takaful and
  ReTakaful Company.
• Bahrain/Saudi Arabia (1985) Islamic Insurance and
  Reinsurance Company.
• Tunisia (1985) B.E.S.T. Re
• Malaysia (1997) ASEAN ReTakaful International.
• Dubai (2005) TakafulRe by ARIG.
• Lloyds of London to have a ReTakaful Syndicate in
  2007.
• SwissRe has formed a separate ReTakaful Pool
• MunichRe to form a separate ReTakaful Pool
• Provision in Takaful Rules 2005.

42
T I M E L I N E T A K A F U L
I N P A K I S T A N
Report by the Council
Takaful Rules
Objectives Resolution
2005
1949
1992
1983
2000
2006
Review by Council of Islamic Ideology
Insurance Ordinance
TAKAFUL PAKISTAN LIMITED
43
Takaful Prospects in Pakistan

• 97 Muslim population.
• Demand for insurance increasing with increase in
  per capita income.
• Personal lines insurance business (leasing,
  health, Medicare) growing at a higher rate than
  other conventional classes.
• Islamic banking on sound footing with support of
  the Govt.

44
TAKAFUL - TARGET MARKET

• People who do not insure due to religious
  reasons.
• People who insure and are insensitive to
  religious reasons.
• People who currently do not insure at all.

45
Challenges to Takaful

• Skepticism.
• Lack of uniformity in Shariah decisions.
• Windows issue.
• Regulatory issues.
• Capacity constraints due to inadequate ReTakaful.
• Limited Investment avenues.
  
• H.R. issues.

46
Introduction toTAKAFUL PAKISTAN LIMITED
47
TAKAFUL PAKISTAN LIMITED

• Takaful Pakistan is a joint venture of
  prestigious local foreign institutions,
  including
• House Building Finance Corporation.
• Emirates Global Islamic Bank.
• Arif Habib Securities.
• Sitara Chemicals.
• Emirates Investment Group (Sharjah).
• Al-Buhaira National Insurance Co. (U.A.E.)
• Large initial paid-up Capital.

48
TAKAFUL PAKISTAN LIMITED (Contd.)

• Managed by dedicated professionals, committed to
  the cause.
• ReTakaful arrangements with a consortium of
  internationally reputed ReTakaful operators.
• Shariah Board comprises of eminent scholars.
• BancaTakaful and MicroTakaful products.
• We intend to be the trend-setter for excellent
  Clients Servicing, Operational bench marks and
  prudent Underwriting practices.

49
Conclusion

• Takaful defined.
• Comparison with conventional insurance.
• Takaful Models
• Takaful Types
• BancaTakaful
• ReTakaful
• Takaful Pakistan Limited

50
Thank you for your attention